Debt – The First 5000 Years

Debt

This is my current read. To be honest, I bought it because it was on sale on Amazon, I’m interested in the history and because it was rated quite high. So far it’s an excellent find.

This book is reshaping how I think about finance, money, and debt. I’ve always been fascinated the the arcane way ‘money’ is created in our reserve banking system. It seems crazy that our banks create ‘government debt’ before they create money. If we want more money in our system, we create more government debt first. This seems a crazy way to run a banking system. And it explains why governments will always be in debt.

But David Graeber argues that it’s not just governments what have created money this way. David argues that historically debt existed before money. His enquiry starts of when he is describing his work with the a social justice organization in favour of cancelling the developing nations (formerly the Third World) debt. At this dinner party, his guest makes the comment well, “all debts must be repaid, don’t they?”. David realized that this is a moral question not an economic question. For indeed from an economic standby the opposite is true – many debts cannot, should not and will not be repaid. That is why bankruptcy laws exist and that is why investors get paid a ‘risk premium’ in the form of ‘interest’. If Debts were literally always repaid, economic theory would imply interest rates would basically be zero.

Further, David explores that fact that morality and economics have always been intertwined. Biblical terms like ‘redemption’ and ¬†‘reckoning’ are ancient financial terms. Religion and morality and finance are tightly woven together (and by extrapolation our breakdown in our understanding of morality now has broken our financial world as well).

Key to understanding that morality and money are so tired, is understanding the myth of our money creation. Adam Smith and pretty much every economic textbook starts by describing how we arrived at money and then debt. It’s a story about how we were first hunters and gathers that forged for our basic needs. When we learnt that we could specialize in say “arrow making” or “tent sewing” we learnt to barter on good for another. The barter world has a problem that economics is known as the ‘double coincidence’ problem. Simply put, this means that if I make arrows and you have meat, for us trade, by coincidence you must happen to want arrows and I must happen to want meat. But what if you prefer a spear or I have too much meat already? We simply can’t trade. So currency was created to facilitate trade.

It’s a beautiful story that creates the myth that currency is simply a tool of exchange used to facilitate and easier exchange of production. The problem as Mr Graeber’s anthopolists see it, is that no such society existed. In no time or place has such a barter community existed. In fact, it appears that credit and therefore debt was created well before money. Which makes sense when you think back to basics of imagining “well, you can have my spear but you owe me one”.

Debt was nearly always a government function to facilitate war. Picture in medieval times trying to raise an army of 1000 men. These men would normally have employed raising food for themselves. You would need nearly another 1000 men working to provide the army with food. So how do you entice men to raise food for themself plus another man. The answer was to create a currency (a token) to pay the man for his food, but then require him to pay another in tax. With taxes came debt in the effort to feed an army.

It is the very close and strong relationship between debt and violence that has lead religious record to speak very often and very strong about this topic. In some religions borrowing money was a sin, while in others to lend was a sin. In either case the moral lessons of forgiveness and generosity as opposed to strict enforcement applied. This was not because religious doesn’t believe a debt shouldn’t be repaid, it is because a debt is likely already repaid.

How Debt and Money are created is the centre issue of politics. Governments have always had a monopoly of deciding how money is created, and therefore on how much debt we are ‘born with’. ¬†This has changed at different times, resulting in different values to different people.

The Wizard of Oz (oz being the abbreviation for ounce, as in an ounce of gold) was written at the turn of the last century as a warning or message to the different parties. The straw man with no brain was the farmers, the tin man with no heart was industry who didn’t support the plight of the farmers from “wicked witch of the west” which was the east and west coast bankers. The lion without courage was the political elite.

Interestingly the author notes that currencies were not first used for trade. In most tribes or clans, tools and food were provided communally. Currencies were used for ceremonial goods, in essence, buying status. The items that became currency were themselves items that were sought after for status. Cattle being the notable exception but gold, silver, shells, pearls, inks, etc all have not true value aside from the decoration of self. This leads back to the concept of honor since that is basically what was being bought with these goods. In fact, some societies outlined this very explicitly. In ancient Ireland, large tables layout the value of honour. Dishonoring a King was six cattle, a nobleman 3, and so on. If you injured another man, you were ‘in debt’ for the cost of his honour, plus the cost of the injury which was all pre-calculated. Honour becomes a strange concept when we consider that honour is tightly tied with debt – “debt of honour”, “honour one’s debt”, etc. The oldest traces of financial debt we have are all tied in with honour. This becomes more telling when we consider that honour is a concept used mostly in violent society. Even now, talk of “maintaining the family honour” or a “code of honour” usually ends in violence. Honour can defined in this way as excessive dignity.

The book takes a look into the darkest corners of debt. The sale of women in history, and the slave trade. Interstingly, while debts were occasionally listed in ‘women’, debts were not usually settled in women. In fact in some cultures it appears that by listing a debt in women, the debt was simply made unpayable. In some places it was understood that the only thing that could ‘buy’ a woman (for marriage) was another woman. Sisters were often traded between clans. When one clan didn’t yet have a suitable woman to trade for marriage, it was acknowledged that a ‘debt’ was owed. Often cattle were traded here, but not in the manner of cattle for a woman, but in the manner of ‘interest’ to acknowledge that a debt was still owed to the other clan. In cases where women were actually traded or bought, it was typically where the woman was “acquired” through pillage and war. To commoditize a human man or woman, means to violently rip them from their community. A human becomes a fungible good through violence.

The scary thing about the slave trade was that it wasn’t the violent immoral act we imagine it was. It was something much worse. While white slave traders occasionally roamed the jungle and kidnap and imprison Africans, the industry itself became much more insidious. A local trader in Africa would borrow money from a merchant against a load of slaves that he not yet acquired. As collateral he would often provide his family until he returned with his ‘wares’. This trader would then make contact with other tribes and similar credit swapping arrangements would follow. This type arrangement would continue in till eventually in some tribe, some one was judged in default of his debts, and thus traded up the ladder until eventually some one was put on a boat bound for a Caribbean plantation. Loans and debts were used to ‘legitimize’ what was simply an act of pillage.

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